A corporation is treated by law as a physical entity. Its life is separate from those
of its owners or stockholders. The questions of whether or not to incorporate are not
easily answered; however, a growing business should investigate the benefits and
complexities of incorporation.
One of the main advantages of incorporating is limited financial liability for the
business owner. The firm is responsible for its own taxes and debts. If the firm is sued
for any reason, if debts are unpaid or the firm becomes bankrupt—the liability of the
owner is limited to the value of the personally held stock. Personal assets are not at
risk. The caveat is that in recent years the "corporate veil" has been pierce.
Negligence may bring liability to the owner personally. In addition, being name in a civil
case along with the company, may result in personal liability. The corporation offers some
protection, but the owner may still want additional personal insurance to protect himself
or herself against civil penalties.
For the small business owner, the corporation provides a vehicle for easily
transferring ownership in the company. Stock shares may be distributed to family members
or sold to investors. A small corporation that is successful creates its own financial
stability. And the future of the business is tied to stock holders rather than a single
owner. For the owner, this provides for the continuation of the business in the event of
an untimely death. A corporation may also make it easier for the business to raise
capital, borrow money and obtain credit.
The chief financial drawback of incorporating is double taxation. The company pays
taxes on profits and then the stockholders—who in the case of the typical small
corporation are likely to be the owner-operators—pay income taxes on the dividends
they receive. The "C Corporation" was just described. The "Sub-Chapter S
Corporation" also affords limited personal liability protection, as the firm is not
taxed as a corporation unless its capital gains exceed $25,000. Stockholders report their
share of business profits or losses on their individual tax returns. This form of
incorporation is common with small companies.
Corporations are also subject to many state and federal controls. If you want to expand
your business to other states, you may have to pay additional fees. There can also be
complications in filing annual tax forms, which require more extensive bookkeeping during
the year. Finally, the corporate charter or articles of incorporation must state the
business activities of the firm and would require amendment should you decide you want to
expand the activities of the business.
Before deciding to incorporate or not to incorporate, meet with your tax attorney.
Obtain expert advice as it applies to your business and personal financial situation and
goals. There are pros and cons to incorporating, it is a matter of deciding what is
important to you as a business person. If you would like to discuss the various forms of
business organization, contact the SCORE Association (Service Corps of Retired
Executives). More than 12,000 volunteer, business counselors donate their time to assist
entrepreneurs. SCORE is a nonprofit organization and offers counseling as a free and
confidential public service. For a copy of the brochure "No One Knows More About
Small Business Ownership" and a referral to a local SCORE chapter, call 1 (800)
634-0245.
